Rosy Indian economy will soften the blow of Fed rate hikes

Acche Din for the US? Well, Fed Chairman Jerome Powell has said as much. He made it clear that the US economy is “doing very well” soon after the Fed raised interest rates by a quarter percentage point to a range of 1.75 per cent to 2 per cent for the second time this year. The increase does not come as a surprise to markets, but the slightly more aggressive pace does point to greater urgency to tighten the policy.

What does the data say? Unemployment fell in May to the level the Fed had forecast for year-end. US growth is also getting a boost from the huge tax cuts and rise in federal spending. And inflation is close to the goal. The dot plot –a statistical chart with data points plotted on a fairly simple scale — showed eight Fed policy makers expected four or more quarter-point rate increases for the full year, compared with seven officials during the previous forecast round in March.

Should India and other emerging markets worry, given that these economies could face stress as they cope with a stronger dollar and rising interest and capital outflow? Borrowing overseas will become expensive too. The RBI has partly factored in risks the external sector presents to inflation in India while raising the policy rate earlier this month.

More tightening (read policy hikes) cannot be ruled out if the Centre and the states slip up on their fiscal deficit targets to appease voters ahead of the polls. So, adhering to fiscal discipline is paramount to keep inflation under check at a time when investment is picking up.

In a recent article written in the financial times, RBI Governor Urjit Patel had urged the Fed to reduce the pace of unwinding of its balance sheet to limit the impact of shortage of dollars in emerging markets. His predecessor Raghuram Rajan, though, reckoned that emerging markets are in a stronger position to absorb hikes compared to the so-called temper tantrum in 2013.

A depreciating rupee should be no cause for panic. The real effective exchange rate has risen and must come down, for exports to grow. That said, ensuring strong macro- economic fundamentals is India’s insurance cover, should there be any accident.

This article originally appeared here via Google News